Rant for a Friend - Intermission

I interrupt this rant to bring you a rant on a totally different topic - sorry, but the switching system on the tracks upon which my train of thought runs tends to work that way. Besides, I read something this morning that made my blood boil. I'll return to the promised stream of consciousness tomorrow.

I've often railed against the talking heads on Bubblevison (CNBC) and the headline writers at Bloomberg News, with their rose-colored slant on the real state of things economic. But I got a doozy from the latter this morning.

Bloomberg was reporting on this morning's release of third quarter productivity and unit labor costs data. For the uninitiated, productivity is worker output per hour worked, in the aggregate, and unit labor costs reflect the input cost of labor into a unit of output.

Quite simply, when companies engage in a prolonged bout of job-cutting in an economic downturn - especially a lengthy and deep one - they're attempting to do the same amount of work with fewer workers. More accurately, though, they're not doing the same amount of work; demand is down, thus so is production. Early in the job-cutting phase, which tends to respond to the decline in demand, productivity will fall, as the job cuts have not yet caught up with the output decline. Later in the cycle, that situation will reverse, and up goes productivity.

Thus it should come as no surprise that productivity in the third quarter rose at the highest pace in six years. Let's make no mistake as to why this happened: hours worked fell at the sharpest year-over-year pace in the six-decade history of the data. Some companies even ramped up production in the third quarter; namely, the automakers, in response to the cash-for-clunkers-stimulated demand. But they didn't add workers to do it. So see? Productivity - output per worker hour - gained.

So this is all well and good. But Bloomberg chose to end its story with the following paragraph:

"In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999."

Now, hold on just a doggone minute. Let's break this down.

Productivity indeed gained in 1992. Why? In the aftermath of the '90-91 recession, companies cut jobs and entered the classic "do more with less" mode. As a result, productivity year-over-year rose to exactly where it is now in the first quarter of 1992, well into the cycle of job-cutting.

But productivity then tanked, dipping into negativity territory by the end of 1993, as companies overshot expected demand and hired too many workers, effectively doing less with more. Too often, that's what companies do. Productivity then rose modestly in 1994 before once again diping into negative territory in 1Q05.

After that, we did indeed see gains in the late '90s, though we never did reach the level where we are now, or where we were in the aftermath of the early '90s recession - until mid-2000, when the stock market had peaked and we were headed into a downturn again. And once again, the primary culprit was job-cutting, not technology.

Now, Greenspan did indeed espouse the theory that productivity gains were systemic and resulted from technological advances, and that productivity would therefore naturally contain inflation, allowing easy monetary policy.

Big deal. At one point in human history, we universally accepted the theory that the world was flat. That didn't make it good science.

Greenspan's view of productivity turned out to be his Great Undoing. He did indeed mistakenly believe that his theory allowed the Fed to keep interest rates too low, too long. That, of course, led to the dot-com bubble. In its aftermath, he once again kept rates too low, too long. And that, of course, led to the housing bubble.

Well, Alan Greenspan is no longer Fed Chairman. But at the conclusion of yesterday's FOMC meeting, the Bernanke Fed reiterated its pledge to keep rates as low as possible, as long as possible, in spite of the belief of some that the economy is picking up steam.

Undoubtedly, that is due in part to the Fed's realization, deep down, in spite of all the "green shoots" talk, that we are far from out of the woods.

But part of it is also due to the fact that this Fed is even more dovish on inflation than it was under Greenspan.

The Aussie central bank has acknowledged that it must, in addition to the traditional dual policy mandate of promoting full employment and fighting inflation, focus some effort on avoiding the inflation of asset bubbles, which, as we've seen, can be catastrophic. They get it. And to that end, they have raised interest rates twice in the last two months as evidence appeared that the economy Down Under was gaining strength. They chose to err on the conservative side, risking the politically unpopular outcome of cutting off growth too quickly in favor of avoiding the greater economic risk of inflating another asset bubble.

And the World Bank and the IMF have recently warned that bubbles could very well be forming, especially in Asia, where growth is taking hold faster than in other parts of the world. Indeed, the day China recently opened its new Nasdaq-like stock exchange, prices doubled. That smells like a bubble to me - I wish I could short an index on it.

But our central bank - too inextricably tied to the political winds - is not going to be proactive. Which leads us to a rule of thumb far more useful than Mr. Greenspan's flawed one:

"Those who fail to learn from past mistakes are doomed to repeat them."